Learning ObjectivesAt the end of the lesson, students will be able to:1.Identify the main components of the balance of payment account and its relationship to the exchange rate.2.Distinguish between the nominal and real exchange rates.3.Identify the various types of exchange rate regimes.4.Demonstrate how an exchange rate is determined.5.Discuss the advantages and disadvantages of floating exchange rates.6.Demonstrate how a fixed exchange rate works.

The Open EconomyThe Balance of Payments

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THE BALANCE OF PAYMENTS•Meaning of the balance of payments•The current account–trade in goods: records domestic payments for imports and receipts of payments for exports of goods.–Also known as balance of visible trade or merchandise trade.

THE BALANCE OF PAYMENTS•Meaning of the balance of payments•The current account–trade in services: records domestic payments for imports and receipts of payments for exports of services.–Also known as balance of invisible trade.

THE BALANCE OF PAYMENTS•The current accountsquare4current transfers and income flows: records income flows in terms of wages, interests and profits flowing in and out of a country and net current transfers from governments and other international organisations.

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